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December 2019 Regulatory report

By Market Insight Team | Posted January 16, 2020

Generation

On 13 December, the Conservative Party secured a 43.6% majority vote in the General Election, winning 364 seats, with significant gains made in the north of England and the Midlands. The Labour Party secured 32.2% of the vote, winning 203 seats overall. Liberal Democrat leader Jo Swinson lost her seat to the Scottish National Party. The Lib Dems received 11.5% of the vote. DUP leader Nigel Dodds also lost his seat to Sinn Fein, receiving just 0.8% of the vote. Conservative Party Prime Minister, Boris Johnson expressed an ambition to deliver “colossal new investments in infrastructure and science, using incredible technological advantages,” and to make the UK “the cleanest, greenest on earth with the most far-reaching environmental programme.”

Delivery

On 9 December the transmission and gas distribution companies submitted their RIIO-2 business plans that outline the activities that the network companies intend to undertake during the price control and revenue that they wish to recover. Ofgem called for evidence on 13 December on the plans of the four companies: National Grid Electricity Transmission (NGET), National Grid Gas Transmission (NGGT), Scottish and Southern Electricity Network (SSEN) and Scottish Power Networks (SPN). Ofgem is also consulting on the key enablers for its distribution system operation (DSO) work programme, specifically on reforming the distribution network operators’ (DNOs) Long Term Development Statements (LTDS).

Usage

UN Climate Change Conference COP25 ended on 15 December, with a compromise deal for all delegates to present new, improved carbon cutting plans by the time of COP26 in Glasgow next year. UN Secretary-General António Guterres said: “I am disappointed with the results of COP25. The international community lost an important opportunity to show increased ambition on mitigation, adaptation and finance to tackle the climate crisis. I am more determined than ever to work for 2020 to be the year in which all countries commit to do what science tells us is necessary to reach carbon neutrality in 2050 and a no more than 1.5-degree temperature rise.”


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Generation

GE election and industry responses

Announced on 13 December, the Conservative Party secured a 43.6% majority vote in the General Election, winning 364 seats, with significant gains made in the north of England and the Midlands. The Labour Party secured 32.2% of the vote, winning 203 seats overall. Labour Leader Jeremy Corbyn confirmed he “will not lead the party in any future general election campaign,” while Liberal Democrat leader Jo Swinson lost her seat to the Scottish National Party. The Lib Dems received 11.5% of the vote. DUP leader Nigel Dodds also lost his seat to Sinn Fein, receiving just 0.8% of the vote. Conservative Party Prime Minister, Boris Johnson expressed an ambition to deliver “colossal new investments in infrastructure and science, using incredible technological advantages,” and to make the UK “the cleanest, greenest on earth with the most far-reaching environmental programme.”

Commenting on the General Election result, the National Infrastructure Commission (NIC) stated that it will look forward to the government’s detailed plans in the new year, while Oil and Gas UK (OGUK) Chief Executive Deirdre Michie reflected on the association’s focus on “helping to achieve net zero emissions.” Executive Director at the Aldersgate Group, Nick Molho advised for key priorities to include “credible plans to fund the net zero transition.” The Renewable Energy Agency (REA) also accepted the Conservative Party’s commitment to achieve the climate objectives set out in its manifesto, but urged the new government to be “more ambitious and commit to wholesale systems change across energy.”

RenewableUK’s Director of Strategic Communications Luke Clark stated: “It’s great to see the Conservatives reinforcing their commitment to net zero emissions by increasing our offshore wind target to 40GW by 2030 and pledging support for innovative floating offshore wind projects.” RenewableUK CEO Hugh McNeal echoed this statement and affirmed that the trade body will look forward to working with the new government to grow the UK’s renewable energy sector. SSE Chief Executive Alistair Phillips-Davies also called on the implementation of a “net zero roadmap.” Energy UK Director of Policy Energy, Audrey Gallacher observed that while Brexit remains high on the political agenda, the trade body welcomes Johnson’s commitment to delivering net zero emissions by 2050.


Policy Exchange first 100 days of government

Thinktank Policy Exchange has urged the government to take a market-led approach to reduce emissions in a new report. Published on 15 December, The First Hundred Days charts the policies that the new Conservative government should implement in the first 100 days of office to achieve its manifesto pledges. The thinktank has called for a Comprehensive Fiscal Review to take place, with the aim of aligning all fiscal policies with net zero. VAT on critical clean energy technologies, such as batteries and solar panels should also be eliminated. The review should consider plans for an economy-wide carbon tax, with border adjustments and dividends, in case current plans for an EU Emissions Trading Scheme (ETS)-linked UK ETS do not prove viable.

Additionally, the thinktank urged for the implementation of the Conservative manifesto commitments to nuclear, hydrogen and carbon capture and storage (CCS) and highlighted the use of nuclear technologies. More ambition is also required on electric vehicles (EV), where the Budget should include the launch of a more ambitious date for banning the sale of new internal combustion engine vehicles, following the review of the 2040 date.


UK day-ahead power prices negative for first time in history  

On 9 December, the UK experienced a negative day-ahead trading price for the first time, with prices for 03:00AM to 04:00AM delivery on the hourly day-ahead auction dropping to -£2.84/MWh. The cause was record levels of wind generation. Across the weekend of 7 and 8 December, wind generation in GB was exceptionally high, with a peak of 16.2GW recorded on 8 December. As a proportion of demand, wind generation averaged 38.3% over 8 December, reaching a peak of 41.6%.

High wind output carried over into the early hours of 9 December and combined with low demand levels, saw outturn day-ahead hourly prices between 3:00AM and 4:00AM reach -£2.84/MWh. This followed the trend already seen for intraday trading, with 27 settlement periods showing negative pricing across 7 and 8 December. The greatest was seen for imbalance prices, which dropped to a low -£88.00/MWh and stayed below zero for 23 consecutive periods across 7 and 8 December.


EC presents European Green Deal for 2050 net zero target

The European Commission (EC) presented the European Green Deal on 11 December, which sets out how to make Europe the first climate-neutral continent by 2050. The EC said the deal provides a roadmap to move to a clean, circular economy and stop climate change, revert biodiversity loss and cut pollution. The EC will present the first ‘European Climate Law' by March 2020. It will also present the Biodiversity Strategy for 2030, the new Industrial Strategy and Circular Economy Action Plan. Work will begin for increasing the ambition on Europe's 2030 emissions targets, setting a realistic path to the 2050 goal. By summer 2020, there will be a comprehensive plan to increase the EU 2030 climate target to at least 50% and towards 55% of emissions compared with 1990 levels.

The EC will, by June 2021, review and propose to revise where necessary, all relevant climate-related policy instruments. This will contain the Emissions Trading System, including a possible extension of European emissions trading to new sectors of the economy. It will also include Member State targets to reduce emissions in sectors outside the Emissions Trading System, and the regulation on land use, land use change and forestry. The EC will propose to amend the Climate Law to update it accordingly. Meeting the objectives of the European Green Deal will require significant investment. Achieving the current 2030 climate and energy targets is estimated to require €260bn (£219bn) of additional annual investment, representing about 1.5% of 2018 GDP.


Thinktank argues pro-market methods to reach net zero

Thinktank Onward published a report on 28 November that presents a plan to decarbonise the UK economy “without undermining competitiveness, hitting consumers or overburdening taxpayers.” The report, Costing the Earth, recognises the significant progress to date, such as the near complete phase-out of coal in the GB power sector. It highlights lack of progress in decarbonising heat and transport and claims the incentives regime for carbon is patchy, complex and highly susceptible to abrupt policy changes.

The report is guided by six core principles: the use of markets; a balance between government action and market economics to foster innovation; maximising synergies between decarbonisation and societal challenges; ensuring a just transition; institutional frameworks to ensure that the government and regulators act in accordance with the net zero target and to set an example on the world stage. The report recommends the reintroduction of the Carbon Price Floor, a change in VAT rates for gas and electricity and a carbon fuel duty escalator, and for a Net Zero Secretariat to service the Cabinet Committee on Climate Change to be established.


Delivery


RIIO-2 business plans

On 9 December the transmission and gas distribution companies submitted their RIIO-2 business plans that outline the activities that the network companies intend to undertake during the price control and revenue that they wish to recover. Ofgem called for evidence on 13 December on the plans of the four companies: National Grid Electricity Transmission (NGET), National Grid Gas Transmission (NGGT), Scottish and Southern Electricity Network (SSEN) and Scottish Power Networks (SPN).

NGET plans to connect 15.3GW of generation capacity over the five years of RIIO-2, investing in clean power and flexible storage. NGGT’s business plan expects to slightly reduce household bills, and like NGET, puts an emphasis on network resilience from physical, environmental and cyber risks. NGGT also plans to reduce emissions and lowerits overall carbon footprint. SSEN has planned totex of £2.36bn over the five years of RIIO-2. £891mn of this is projected to go towards “building a network for net zero.” The main drivers of SPN’s totex of £1,375bn are network maintenance, innovation and in particular reinforcement. Views are invited on the business plans until 10 February.


Ofgem considers enablers for DSO

Ofgem is consulting on the key enablers for its distribution system operation (DSO) work programme, specifically on reforming the distribution network operators’ (DNOs) Long Term Development Statements (LTDS). On 6 December, Ofgem issued an informal consultation on what it considers “key enablers” and is seeking views on the content and formats of “heatmaps” to express technical information about the networks and whether these should be standardised. Ofgem also invited views on whether there should be a common methodology or principles for estimating load growth, alongsid what extensions to current network monitoring across voltage levels would be valuable.

Ofgem considered the lack of clarity in the DNOs remit relative to flexibility providers or aggregators. If DNOs own and operate the link between generators and markets, Ofgem observed there is potential for conflicts of interest. It also wants to avoid “path-dependent institutional lock-in.” Responses are requested by 7 February.


RIIO2 ED2 sector decision

On 17 December, the regulator issued its decision on the framework for the distribution network operators’ (DNOs’) price control that will commence in April 2023. The regulator maintained its position on enabling the DNOs to propose investments that are “highly anticipatory,” as one method of managing uncertainty over the price control period. Ofgem decided to introduce models of early competition and late competition for projects that meet specific criteria. Decisions on financing include that the baseline allowed return on equity will be set using the same methodology applied to other RIIO sectors, with full debt indexation retained. There will be a return adjustment mechanism as a failsafe in the form of a sculpted sharing factor.

Ofgem noted that decarbonisation may be one of the most challenging issues and will explore this through its advisory working groups. For this price control, Ofgem said it might need to more directly link DNOs’ revenues to the achievement of decarbonisation outcomes that go beyond the delivery of traditional network services.


Usage


UN Secretary-General “disappointed” with outcome of COP25 

UN Climate Change Conference COP25 ended on 15 December, with a compromise deal for all delegates to present new, improved carbon cutting plans by the time of COP26 in Glasgow next year. As reported by the BBC, divisions arose over plans for carbon markets, with the issue being delayed until COP26. UN Secretary-General António Guterres said: “I am disappointed with the results of COP25. The international community lost an important opportunity to show increased ambition on mitigation, adaptation and finance to tackle the climate crisis. I am more determined than ever to work for 2020 to be the year in which all countries commit to do what science tells us is necessary to reach carbon neutrality in 2050 and a no more than 1.5-degree temperature rise.”

Guterres urged business and civil society leaders to press governments into articulating policies that support private sector efforts to address climate change. Speaking on 11 December, he said: “I’m meeting more and more business leaders that complain that they cannot do more because governments will not allow them to do so, because of the environment that is still created in the bureaucratic, administrative, tax regulatory and other frameworks that are under government control.” Guterres also laid out 10 priorities to tackle the climate crisis. They include securing commitments from the main emitters of more ambitious national commitments by 2020, ensuring that all governments follow the example of the 75 countries that committed to coming forward by next year with net zero emissions strategies for 2050 and ensuring that national commitments include a just transition for people whose jobs and livelihoods are affected in the energy transition.


UKERC urges energy efficiency White Paper

The UK Energy Research Centre (UKERC) published its Review of Energy Policy 2019, putting forward recommendations for UK energy policy, including the introduction of a heat and energy efficiency White Paper. Published on 9 December, it finds that, although the focus during the election campaign had been on when the net zero target will be achieved, the government must specify what actions will be taken to achieve it.

UKERC argues that investment and policy decisions by all government departments need to be compatible with the transition to net zero. UKERC stresses that the UK-based environmental trade-offs of net zero policies should be balanced against the avoided global environmental impacts elsewhere. Decisions by Ofgem should also be compatible with net zero. This includes enabling investment in local electricity networks to facilitate heat and transport decarbonisation and ensuring more active use of existing networks. The delay of the Energy White Paper means that there is currently no policy framework for an expansion in renewables.

The report also points at Brexit as an impediment to achieving net zero. It says uncertainty over the UK’s relationship with the EU has put off investors and slowed economic growth. Local energy systems could play a significant role in achieving net zero, UKERC argues, particularly in the integration of electricity, heat and transport. UKERC welcomed that the decarbonisation of industry is receiving more attention but says that policy initiatives are not joined up. Funding for specific projects and industrial clusters should be complemented by market creation policies, including for carbon capture and storage. Additionally, UKERC stresses that the transition to net zero should not compromise energy security.


CCC publishes a Call to Evidence to for UK’s sixth Carbon Budget

On 5 December, the Committee on Climate Change (CCC) launched a Call for Evidence to inform its advice to the government on the Sixth Carbon Budget, set to be published in September 2020. The Sixth Carbon Budget will provide ministers with the CCC’s recommendation on the level of greenhouse gases the UK can emit during the period 2033-2037 and will set out a pathway to meeting the UK’s new net zero emissions target in 2050. The CCC must provide advice on the level of the sixth carbon budget before the end of 2020. The CCC intends to publish its advice early, in September 2020. Responses will help to inform the CCC’s analysis over the next six months and covers five key topics: climate science and international circumstances; the path to the 2050 target; delivering carbon budgets; Wales, Scotland and Northern Ireland and emissions reductions in key sectors of the UK economy. The deadline for responses is 5 February 2020.


Bernstein: LCOE the best metric for evaluating renewables

Bernstein published a report on 12 December, assessing the merits of different metrics for evaluating renewables. The report analysed Levelised Cost of Electricity (LCOE), Energetic Return on Investments (ERoI) and power density as metrics for evaluating renewables. LCOE measures costs to produce a unit of electricity and divides the lifetime costs of building (and recouping returns), operating and decommissioning by the total electricity produced over the lifetime of a power plant. ERoI considers the amount of useful energy obtained for the efforts made to make the energy available for a technology.

Bernstein found that LCOE is the most effective metric for evaluating renewables. LCOEs will directly translate into strike prices in renewable auctions, which Bernstein said have become the norm as countries move from administratively determined subsidy levels for renewables to competitive auctions, such as the Contracts for Difference. ERoI, Bernstein said, ignores the economics of investments, is “fraught” with a number of other drawbacks like being unable to include externalities such as carbon. Using ERoI results in the same conclusions about the increasing viability of renewables that LCOE does, leading Bernstein to question the usefulness of ERoI. Bernstein said that, while onshore wind has very low power density, the turbines and equipment only occupy 1-2% of the area of the wind farm and the rest can be used for agriculture/grazing, implying energy density could rise 50x. Also, roof-top PV and offshore wind make no additional claims on existing land and ground-mounted PV is often based in arid areas or can be integrated with other uses. Measured with power density, metric fossil fuel and nuclear generation score very highly.


Private sector companies pledge net zero carbon buildings

The World Green Building Council announced on 11 December that seven world-leading private sector companies have pledged to cut emissions from their buildings to net zero, by signing up to the Net Zero Carbon Buildings Commitment. The companies include Goldman Sachs, Hudson Pacific Properties, Lendlease Funds Management Australia and Petinelli. They have pledged to take urgent action to ensure their own portfolios of buildings operate at net zero carbon by 2030 at the latest.

Additionally, the Building Societies Association (BSA) announced on 11 December that it has joined the Coalition for the Energy Efficiency of Buildings (CEEB). The CEEB aims to develop the market for financing net zero carbon and climate-resilient buildings in the UK by accelerating the pace of financial innovation and scale-up. The formation of the CEEB, which comprises global experts from financial services, local and national government, energy and construction industries and academia, was announced by the Green Finance Institute on the same day.

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